Sterling picks up – EURGBP rolls over

Sterling has perked up today following a stop-loss driven short squeeze in Asia ahead of UK inflation data today, the actual headline figured showed September cpi data at 1.0% beating expectations of 0.9%. Cable immediately rallied to 1.2273 (also its Asian session high) on expectation that higher inflation would make the possibility of an interest rate cut next month less likely, before settling back to 1.2245.

While the pound remains comfortably above the flash-crash lows of October 6, it is still lower by an average of about 18% against the G3 currencies since the Brexit vote. Downside momentum may abate as speculative accounts are running a record net short position in the pound (as interpolated by CFTC futures data), while the currency’s losses are already near historical extremes for sterling bear markets. But Brexit-related uncertainties remain a concern. The Autumn report from the independent economic forecast group ITEM, released yesterday, found that “many firms have put investment and recruitment on hold,” and while detailing various post-EU opportunities, forecast that a “WTO-based Brexit” would likely “take about 4% off Britain’s GDP by 2030. The UK Treasury’s recently leaked estimates regarding the coast of leaving the EU and switching to WTO rules was a loss of GDP of between 5.4% and 9.5% after 15 years.

Along with a possible SHORT position in EURJPY yesterday the EURGBP looks to be rolling over too in the short term down to the 0.8900 area (Target 1) from an entry at 0.9016. The tweezer top last week has been followed by some consolidation around the 0.9000-9050 level. MACD, RSI and the Parabolic SAR suggest a further move lower. The 10 DMA is providing support around 0.8960 with the 20 DMA further down at 0.8810 and Target 2.

Thursday this week remains key for the EURO this week. With growth indicators suggesting ongoing momentum and inflation starting to move higher, the ECB clearly is reluctant to add even more stimulus to an already very expansionary policy. Still, in order to keep the current program on track and to allow for a follow up program even at reduced levels, the ECB has to address the issue of dwindling supply. After the central bank tasked committees with examining tweaks to the program Reuters sources suggest that first proposals may already be discussed at this week’s meeting, but it seems more likely that any changes will be announced in December, when the decision about QE, which currently is set to end in March next year, will also be on the agenda. So, the most likely scenario is an unchanged policy stance and a pretty uneventful press conference with the ECB repeating its calls on politicians to step up structural reforms in order to boost the Eurozone’s growth potential and help to bring up inflation.